U.S. Manufacturing Surges in January

The U.S. manufacturing sector posted strong growth through January, expanding at its fastest pace in nine months thanks to an upswing in domestic demand and improved hiring among American factories.

Business activity in the U.S. manufacturing sector surged in January, continuing the trend of healthy growth and setting promising conditions for American industry at the start of 2013. Last month, manufacturing grew at the fastest pace since April 2012, with the pace of expansion accelerating due to improvements in several key indicators.

According to the Institute for Supply Management’s (ISM) latest manufacturing Report on Business, U.S. manufacturing expanded for the second consecutive month in January, while the overall U.S. economy grew for the 44th consecutive month.

The ISM purchasing managers index (PMI), a key monthly gauge of the factory sector, rose to 53.1 last month, up from 50.2 in December and 49.9 in November. Readings above 50 indicate overall growth for the industry, meaning that manufacturing activity has rebounded from a brief period of contraction in late 2012. The latest PMI reading stands well above the 12-month average of 51.6.

“Stocks extended gains after the report showed gains in orders, production and factory employment after a fourth-quarter acceleration in consumer purchases and a rebound in business spending,” Bloomberg News notes. “The housing recovery and stabilization in overseas markets indicate factories may keep adding to growth in the world’s largest economy this year.”

Although an increase in the PMI was expected in January, the size of the gain came as a surprise to analysts. Economists surveyed by MarketWatch had forecast a reading of 51 for the month.

Domestic demand was strong in January, with the new orders index jumping to 53.3, up from 49.7 in December and marking a rebound from a period of contraction. New orders last month were at their highest level since May 2012.

Meanwhile, production rose to 53.6 from 52.6 in December, marking the fifth consecutive month of growth, and the employment index climbed to 54 from 51.9, signaling improved hiring and a stronger job market for the manufacturing sector. Inventories surged 8 points to 51 in January, while prices climbed a single point to 56.5.

The steepest declines in January were trade-related, with imports falling to 50 from 51.5 in December, and exports dropping to 50.5 from 51.5 the prior month. These drops may partly be due to mixed conditions in overseas economies.

“The nature of the recovery on factory floors across Asia and Europe was more uneven. Surveys showed growth slowed in India and stalled in South Korea while Britain’s expanded modestly,” Reuters explains. “Two separate versions of China’s purchasing managers’ index (PMI) pointed to rising factory output in the world’s second-biggest economy but at very different speeds, suggesting a bumpy recovery from China’s worst downturn in 13 years…Both showed export orders either grew marginally or shrank as shoppers in the United States and Europe, the two biggest buyers of Chinese goods, reduced spending.”

The four industries that contracted last month were: nonmetallic mineral products; computer and electronic products; wood products; and chemical products.

“Despite the political uncertainty over the debt ceiling, sequester, and federal government shutdown deadlines all coming up in the first half of this year, industrial activity continues to grow,” Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), noted. “[T]he strong improvement in housing starts, solid growth in motor vehicle production, and widespread modest gains across many industries are driving manufacturing activity.”

Although demand for factory goods continues to increase, there are mounting concerns about higher Social Security taxes that could have a long-term effect on consumer spending after a 2 percent tax cut that had been in place for two years expired January 1.

“A big question is how consumers respond to the increase…A person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less,” the Associated Press reports. “Analysts expect the Social Security tax increase to shave about a half-point off economic growth in 2013, since consumers drive about 70 percent of economic activity.”